Anytime you’re faced with a difficult decision and you’re uncertain of which way to go, one thing is always true. You don’t have enough information to make the decision.
In these situations, it is rarely obvious that the obstacle to making a confident decision is the absence of essential information because we put a lot of pressure on ourselves that make us feel like we should know the right and best decision based on our smarts.
There is one decision in particular that new business owners often grapple with when they’re getting started and that is whether they should take on a business partner or go it alone.
Anecdotally, most business partnerships don’t succeed. But I’m not sure how people define success or failure because for some amount of time, usually at least a few years, the partners are together, and both are doing work.
My unscientific analysis is that more likely it is that one partner outgrows the other and at some point, the relationship no longer works for them and this holds the business back.
I started my first venture with a partner and we eventually took on two more partners, one that was short-lived and the other that was a perfect fit. My original partner ended up leaving after a few years due to changes in her personal circumstances, but she never stopped caring and was always supportive even from afar. In our case, it worked out very well for all four of us.
There were two keys to our success: the first being that we shared the same definition of reasonable when it came to dealing with important issues; the second, we held it all together with a legally executed Shareholder Agreement.
If you’re considering starting a business with a partner (or several), you’re probably seeking to reduce your risk of failure by not going it alone.
In my case, I didn’t want to work alone, and I was afraid of being lonely. I’m an extrovert and know that I perform better when there is another stakeholder that I can be accountable to, and I cared less about my partner working as hard as I did than I did about her just being there.
6 Factors That Can Make or Break a Business Partnership
Regardless of your reason for wanting a business partner when starting off, here are a few factors to research as you gather all the necessary information you need to confidently make this decision, that is essentially a “work” marriage.
When you and potential partners are doing due diligence on one another, here are six topics you need to cover to ensure you’re on the same page and share the ideals you’ll use to make business decisions.
Factor 1: Company Mission and Vision
What is the purpose of your company and how will it support all its constituents including the founders, employees, customers, and the community in which it resides? How big do you want to grow this company in terms of sales and number of employees? Talking about these issues alone can take hours and is the first formulation of how each of you thinks about what you’re building.
Factor 2: Ownership and Equity Distribution
I’m often asked how to determine how much ownership and equity each partner should have in the company. When you’re starting out and there is nothing of value to split up, it is easy to shortchange this conversation because half of nothing is nothing. The problem arises when your company is worth a million dollars and half is worth a lot.
In my experience, the right answer to this question is rarely to split it evenly among the founding partners because there are usually factors that set apart their contributions to company value. If the fruits are divided in a disproportionate way from how they were earned, it can get ugly and the business and everyone involved can suffer.
If I were to engage in a new partnership, I would create a matrix using the next four factors and weight them to come up with a draft of how equity should be distributed and use that as a place to start the conversation with my potential partners.
Factor 3: Division of Responsibilities
Even though the partners all have the title partner, each person also needs a functional title with a job description. The exercise of writing these out and deciding together who does what will provide a basis from which to have difficult conversations regarding who is responsible and accountable for what as time goes by.
In this decision, you’ll need to decide if one person will be the de facto leader. You may or may not use the title, CEO, but whatever you call it, in my experience having someone who can bring the team to decisions and is willing to be unpopular if they see poor decisions being made is beneficial to avoiding stagnation.
Not all partnerships function this way as some are set up for the partners to be totally equal and this can lead to things being drawn out.
Think about the adage, “It takes an act of Congress to get anything done.”
Each partner should have functional responsibilities that add value, and expectations should be clear for each one.
Factor 4: Contribution to Company Value
What skills is each partner bringing to the table and how much time do they have to contribute? When you're starting a business, it can be a side hustle for some partners and a full-time gig for others. How do the skills contributed impact the ability to earn revenue and the time spent? These should be considered when discussing equity division.
Factor 5: Agreeing to Terms for the Shareholder or Partnership Agreement
If you’re doing this for the first time, this can feel daunting, but with the right lawyer, you can get through this. If you want to avoid getting burned by your partners, take the time to put this in place before the company is worth a dime.
Cooler heads prevail, everyone still loves one another and are at the height of their reasonable behavior.
If you think about how some marriages end badly, you know you don’t want that for yourself or your business.
In my experience, you can have one attorney help you all draft this document, and each partner can have their own representation for a final review before it’s signed.
Factor 6: Financial Support of the Business
This comes in many forms and usually starts with the founders investing their cash savings or using their credit cards to fund the business before it has revenue.
Once you’re making money and start growing, your cash needs change as the working capital requirements grow more complicated by needing to fund accounts receivables, inventory, or other means of growth.
This leads to bank loans that will require personal guarantees and, in some cases, your growth will require future cash infusions from the partners.
Who on the team has the wherewithal and willingness to make these bank guarantees and investments?
When you’re at the ideation stage with no revenue, no costs, and nothing tangible to account for, these are not the things you’re focused on. But if you have these conversations at this early stage, you’ll know who you can count on to be there and in what capacity, and this will influence Factor 1: Equity (above).
A bad reason to take on a partner is to cure your own imposter syndrome, which is something we all have. But when we dig deep, we realize we have everything we need to be successful. If you want a partner for the right reasons, and you decide to find one, do your research so you have the information to make the best possible decision.
Belinda DiGiambattista is a serial entrepreneur, business coach, and outsourced financial controller and can be found at www.belindadi.com.